There are options available to you to address an Inheritance Tax (IHT) liability during your lifetime, provided you plan sensibly and make use of available allowances and tax planning strategies. Here we look at IHT, NRB, RNRB and the history of tax.
Every year the Chancellor stands up in the House of Commons and delivers his budget to the nation. The nation doesn’t exactly hold its breath, but a handful of accountants and tax consultants gather round and murmur excitedly to themselves.
Every year there are rumours as to what the Chancellor will do and the event does not usually disappoint when it comes to talking points. Whoever the latest incumbent is has managed to provide something notable to get the finance fanatics excited and give accountants something to talk about. In recent years, we’ve seen the Chancellor significantly change the rules or rates around Corporation Tax, Pensions, and Stamp Duty Land Tax, amongst others.
The COVID budget, delivered earlier this year, was always going to contain extreme fiscal measures seldom seen in peacetime, and it enhanced emergency measures introduced on an extraordinary basis during 2020. Who had heard of Furlough 18-months ago?
However, global pandemics aside, the point is that every year there is a sense of anticipation amongst those that work in tax, accountancy, financial services, and other sectors too. What new measures will the Chancellor introduce? There is speculation about what might change, and every year some predictions are right, and some predictions are wrong, but amongst all this conjecture there is one constant - the Inheritance Tax (IHT) Nil Rate Band does not change.
The Nil Rate Band (NRB) – the value of one’s estate that is not subject to an IHT charge – has been set at £325,000 per individual since April 2009. We have already seen twelve years of now change to this, and it is set to stay this way until at least April 2026.
Over the period 2009 to 2020, inflation as measured by Consumer Price Index has increased on average by 2.9% a year, giving a compound interest rate of 37%. In other words, if you had an estate worth £1m in 2009, it was worth £1,371,767 last year, and even more today.
As sobering as these figures are, they don’t tell the whole story.
For many people in the UK their most-valuable single asset is the family home. An Englishman’s home is his castle, after all. The family home also happens to both fall within a deceased’s estate and be notoriously illiquid or difficult to manage if you have an IHT liability.
The rate of house prices in the UK has outstripped inflation since the NRB last changed in April 2009. Back then, the average UK house price was £155,852. Today, that same average house will set you back £255,707 - an increase of around £100,000, or 64%. Therefore, the implication is that the IHT liability in an estate has also risen, and more and more estates are becoming taxable.
However, my point about the treasured family home is pertinent. Although the fact that the Nil Rate Band has not changed for 12-years is true, it is perhaps not the whole truth. Whilst this NRB itself has not changed, in 2017 the Government of the day introduced the Residence Nil Rate Band (RNRB), giving homeowners a potential further £175,000 each of IHT allowance.
There were caveats to this of course; the home had to be passed down the direct bloodline (including adopted children and grandchildren) and, evidently, in order to claim the allowance those leaving the estate actually had to own a property to bequest.
The introduction of the RNRB was a welcome addition to the original NRB. Headlines soon abounded with the idea of a £1m IHT allowance for a married couple (2 x £325,000 NRB and 2 x RNRB), but perhaps this time it was the headline makers who were not sharing the whole truth.
For a start, we can see from the inflation rate of house prices in recent years that the introduction of the RNRB wasn’t really an increase to the IHT free allowance, but a political sticking plaster to, partially, address years of neglect when it came to overhauling the UK’s IHT system.
Secondly, and most importantly, the RNRB isn’t for everyone, even if you own a house and you pass it on to your kids. And that’s because there’s a catch. As soon as your estate hits £2m, the RNRB starts to taper away. Taken Back. Stolen. And by the time your estate is £2.7m, both of a married couple’s RNRBs are gone in full – the figure for an individual is £2.35m.
And so, if your estate is valued at £2.7m or more, we’re back to where we started. The NRB available to you hasn’t changed since 2009 and will stay that way until 2026.
This means that, if you have a taxable estate, more of your estate will be subject to IHT at 40%, resulting in more tax your loves ones will have to pay, and less of your hard-earned assets - including your treasured family home and personally beloved heirlooms - that can be passed on.
This is an issue that impacts everyone, but specifically the country’s high earners. You know, the ones that are out there working hard in their businesses and keeping the economy going. It is the high earners that are the ones that can obtain the largest mortgages, so can afford the largest most valuable houses. And, as we’ve seen, house values are growing at a rate that is far outstripping inflation whilst the NRB is not increasing at all.
Who knows where house prices might go in future. The COVID pandemic has brought about many changes in society, none more so that the prevalence of working from home and the desire of individuals to have nicer home surroundings as we spend more of our time within our own four walls than ever before.
It’s not all doom and gloom, though. “Inheritance Tax is a Voluntary Levy paid by those who distrust their heirs more than they dislike the Inland Revenue,” was first uttered by ex-Chancellor Roy Jenkins in 1986. One can only imagine what the tax fanatics of the time made of a “voluntary” tax!
Though Jenkins’ line is often misquoted, the general point he was trying to make remains as true today as it did then. There are options available to you to address an IHT liability during your lifetime, provided you plan sensibly and make use of available allowances and tax planning strategies. That pre-supposes you want to, of course - maybe you don’t trust your heirs, or maybe you just don’t like them.
Assuming you do wish to leave your ultimate beneficiaries with a significant share, if not all, of your assets, and you also wish to leave them without a huge IHT bill to settle, then the time to plan is now. If you’re waiting for a change in the IHT tax regime, you’ll be waiting longer that than the length of your accountant’s itemised invoice.
Written by Tom Parry APFS, Independent Financial Adviser/Chartered Financial Planner, Integrity365